Managing Risk with Options
Our partner, TraderMinute.com launched its first public $100K challenge in March of 2013. The Challenge is a unique concept where they try to turn $3,000 into $100,000 in only 4 months! They use a live brokerage account and allow active subscribers to follow each trade in real time via email, text, and live video. The question is: Have they ever turned $3k into $100k? Yes: They have accomplished this feat twice with other success of 47K, 19K, 21K, 4K, and 4 losses.
What is the key to the success they have had? Is it because they are ultra-aggressive and take unnecessary risk? Not at all, in fact it is quite the opposite, they are very careful to manage risk when they look for opportunities in the market. The key is that they are able to manage the risk as much as possible by using call and put options. The secret ingredient is that they always keep their risk/reward ratio at 3-1.
This means that they can make 3 times as much money as they are willing to lose. They determine the exit points before they enter a trade. An exit for if the trade goes against them (a stop) and an exit for when the trade moves in their direction (target). For example: one of their recent trades was calls on NFLX. The stop was on a close below the 7 day moving average, meaning that is the stock closed below the 7 day average they would exit the trade with a small loss (around $300). The price target was at $280. This movement in the stock price would give them the potential of a $1,800 dollar gain on their options. Thus they risked $300 for a chance to make $1,800! This is well over the 3-1 risk/reward ratio.
By managing the risk through options and finding the optimal 3-1 risk/reward ratio it can make trading fun and profitable for any trader who is trying to navigate towards profitably through the markets. These are some of the concepts they teach in the live trade seat at traderminute.com.
Please join Global Risk Community and TraderMinute for a free webinar Wednesday September 4th at 5pm EST